Fears in the financial sector that the reputation of institutions - banks as well as fund managers - might suffer as an indirect consequence of stringent sustainable finance regulations might deter firms from developing new ESG products or could make them reluctant to finance companies that claim to be green or sustainable.
That’s according to Julien Froumouth (photo), advisor sustainable finance at Luxembourg’s banking association ABBL, in response to questions from Investment Officer Luxembourg asked in the context of a series of articles updating the discussion on ESG, sustainable finance and the EU’s Sustainable Finance Disclosure Regulation, or SFDR.
“The potential reputational implications for financial institutions promoting ESG could certainly deter financial institutions from developing ESG products or further financing companies that claim to be green/sustainable, if not properly substantiated,” Froumouth said.
IO: Has ESG regulation become an obstacle to running funds?
JF: The ESG-related policy objectives require a robust ESG regulatory framework, and the financial industry has always supported such an approach. However, ESG regulation must be underpinned by appropriate guidance for the sectors, data quality as inputs to comply with the various requirements and a proper sequencing for ensuring consistency, efficiency and ultimately reaching the EU climate, environmental and social objectives. The regulation would become an obstacle if rushed further through the coming months. While the financial industry is fully aware of the urgency for swift actions to support the transition, the ESG regulation is massive and financial institutions need sufficient time to integrate ESG considerations into strategic planning, products and services offering, operational processes and reporting mechanisms.
IO: The EU this summer will review the SFDR and sustainable finance rules. How would you like to see this situation addressed?
JF: This is a unique opportunity to simplify or at least provide additional guidance for the financial sector to make the requirements more practical for financial market participants and ultimately allow financial product manufacturers, distributors and investors to talk the same common language when qualifying sustainable investments. Such a review should not, on the contrary, bring more confusion by adding new layers of complex requirements while the market is still facing challenges to understand and implement the already existing provisions. On this topic, as on any other regulatory issue, the ABBL like the other European banking associations are committed to defining a regulatory framework that ensures investor and consumer protection but also provides the space for its members to innovate and grow in a sustainable manner.
IO: Are fears of greenwashing a factor for managers of ESG funds?
JF: Designing and offering robust sustainable finance products (and advice) that meet both the regulatory requirements and investors’ expectations has become a major move in most financial institutions’ business strategies. However, with increasing regulatory developments and growing attention from all stakeholders in the field of sustainability over the last years, the fear of greenwashing accusations has naturally increased as well. On the one hand banks - as managers and distributors of ESG funds - are highly dependent on sustainability claims from their counterparties/investee companies and on the other hand, they are expected to support the transition despite the lack of clarity and consistency of the regulation as well as the sustainability data gap. As a consequence, the potential reputational implications for financial institutions promoting ESG could certainly deter financial institutions from developing ESG products or further financing companies that claim to be green/sustainable, if not properly substantiated.
There is a broad agreement that fighting greenwashing is absolutely key to achieve sustainability objectives, and that requires efforts from all stakeholders, from policymakers, companies and financial institutions themselves to actors of the civil society. However, one also needs to be careful and prevent spreading the misperception of a general greenwashing in the financial industry that would undermine trust in the entire market of sustainable finance products.
IO: The political debate in the US around ESG investments is heating up after the state of Florida officially banned such investment with public funds. Do you expect that such sentiment can also become a factor in Europe?
JF: The US and Europe’s vision to support their climate objectives and sustainability agenda might differ. While Europe is leading the path with the EU Action Plan on Sustainable Finance, introducing a huge pack of new requirements and rules to channel investments towards sustainable economic activities, the US would primarily focus on public financing and subsidies to support renewable energies and the US green economy. If similar measures have been taken in the EU, the regulatory pressure is nevertheless the most important pillar of the EU Action Plan and one cannot expect this trend to slow down, even if a decision as the one made in Florida were to happen in Europe.
This article is the second in an Investment Officer Luxembourg series taking stock of the current discussion on ESG and sustainable finance in the financial sector in the EU and Luxembourg. The first article ran on 15 May. The following articles will run from Friday.